Think of the darling economies during the
global financial crisis and Asia quickly comes to mind. Not only did the region
recover much faster than its Western peers, but strong quarterly growth rates
of as high as 11.9% in countries like China and India during the crisis kept
the battered global economic engine humming.

Growth in the region and an unprecedented
stimulus package from China worth Rmb4tr ($586bn) also helped restore global
confidence in the financial markets — roles that were usually reserved to the
US or Europe. And once quantitative easing began, Asia was one of the main
beneficiaries, experiencing unprecedented growth in stock and bond markets.

It is very unfortunate that Asian countries
didn’t seize the opportunity to improve their economic structures during the
five year era of flush liquidity and low interest rates and instead just chose
to just leverage up. Policymakers thought that their higher growth rates were
sustainable without meaningful structural reforms. They were wrong.

Even if growth rates were in double digits,
Asian governments should have wasted no time in implementing new reforms to
create more sustainable growth including more policies to drive domestic
demand.

And now that investors are cashing out of
Asian stocks and bonds amid the uncertain future of US quantitative easing, the
skeletons in Asia’s economic closets are coming to light. And what’s left is
ugly asset bubbles (especially in the property sector), policy bottlenecks and
ballooning debt. Sound familiar?

The problems are region-wide. The billions
of stimulus dollars China deployed into infrastructure projects has inflated
state-owned enterprise debt and is putting financial stress on its banks with
non-performing loans now reaching 5% and shadow banking estimated at Rmb21tr or
39% of GDP, according to Moody’s. Although the government is sacrificing fast
growth to improve the quality of GDP in the longer term, the country has missed
the opportunity to reform its banks and state-owned companies.

Indonesia and India are even more stressed.
They are struggling with widening current account deficits, with Indonesia
hitting a record high $10bn trade deficit in the second quarter and India’s hitting
$50.2bn in the first quarter of FY1, because of the painstakingly slow pace of
structural reforms. These countries should have spent the last few years
phasing out oil subsidies and providing an easier path to foreign direct
investment to shrink their fiscal holes. Now, the rupiah and the rupee are
bearing the brunt from the lack of improvement on these fronts. The rupiah is
trading near its lowest level in four years at Rph11,350 against the dollar,
while the rupee hit a record low Rs65.7 against the dollar on August 27.

But it’s not too late to act. However,
Asian countries need to start cracking the whip on structural reforms or they
risk being hit with an even greater drop in foreign direct investment, capital
outflows and weakening currencies. This could surely lead Asia back to a
crisis, and nascent signs of a recovery in the US will not be enough to help
these countries back on their feet.